Bankruptcy Facts - What You Need to Know

The subject of personal bankruptcy is complex and somewhat unpleasant. You could
read an entire book on the subject and still come away with some questions. With
that being said, it is obvious that we cannot possibly cover the whole topic with
one article. This article will provide an overview of the topic of personal bankruptcy
and establish a starting point for making a decision about whether or not filing
bankruptcy is the right option - and if so, how you should go about it. The decision
to file bankruptcy, and determining what type is right for you, should only be made
after careful deliberation and with the advice of a competent bankruptcy attorney.
Knowing the key "bankruptcy facts" is the
critical first step in the decision process.

Filing for bankruptcy is a very common and completely legal way for a debtor to
get out of debt that has become unmanageable...provided that the debtor meets the
eligibility requirements for the chosen type of bankruptcy protection. Let's take
a look at the two most common types of protection (chapter 7 and chapter 13) that
are available to an individual (non-business entity) and what type of eligibility
requirements must be met for each.

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Chapter 7 bankruptcy protection

Chapter 7 bankruptcy can also be referred to as a "liquidation plan" because a debtor's
non exempt assets will be liquidated by the bankruptcy trustee in order to raise
cash to payoff creditors (we will talk about exempt and non exempt assets in a bit).
Chapter 7 bankruptcy is used to discharge most types of unsecured debts such as
credit cards, medical bills and personal loans. Certain types of debts, such as
federal or state taxes and student loans may not be discharged. Once the bankruptcy
petition is filed and your creditors are informed, you will enter into the "automatic
stay" period. This is a temporary period of time in which your creditors must stop
all action against you - including foreclosure, collection calls, shut off of utility
services and more. However, the automatic stay is temporary and eventually your
creditors will resume action against you unless they are paid or an agreement is
reached.

Exempt vs. Non-exempt assets. Examples of exempt assets are your primary residence
and your primary vehicle. Non-exempt assets could be virtually everything else -
including investments, real estate and other property. In a chapter 7 bankruptcy,
your non exempt assets will be sold in order to payoff your creditors. You will
not get anything from the sale of these items.

What happens to your primary residence and your primary vehicle? Since the debts
associated with these types of property are secured debts, the creditor has the
right to foreclose on the home and repossess the automobile in the case of non-payment.
If the debtor does not wish to keep the home or the car they can choose to simply
walk away from these pieces of property and allow the bank to take possession. If
the debtor does wish to keep possession of the home or car then they will need to
work with the creditor to reaffirm the debt. This point is a little confusing but
think of it this way - the chapter 7 bankruptcy discharges your responsibility to
pay back all of your debts - but in the case of your home and your car (if you wish
to keep them) you will need to reaffirm or take on those debts again. You, or more
likely your attorney, will negotiate with the creditor to come up with terms for
the reaffirmed debt that satisfy both parties.

Eligibility requirements for chapter 7 bankruptcies

The biggest qualification is related to the income of the debtor. If the debtor's
income is higher than the state median then a "means test" will be applied to see
if the chapter 7 is feasible. This "means test" will look at the debtor's gross
monthly income over a 5 year period. If this monthly income is more than $10,950
or 25% of the debtor's unsecured debt then the individual will not be eligible.

Aside from meeting the income requirements, a potential chapter 7 bankruptcy applicant
must prove that he or she has received
credit counseling from an approved agency within the last 180 days.

Chapter 7 bankruptcy is unique because of the liquidation of non-exempt assets and
the relative speed at which these cases can be handled vs. other types of bankruptcy
protection.

Chapter 13 Bankruptcy Protection

Chapter 13 bankruptcy protection is commonly referred to as "wage earners protection".
It is referred to in this way because this type of plan affords debtors who have
a regular income the opportunity to workout a payment plan with their creditors.
A good way to think of Chapter 13 protection is as a restructuring of your debts.
Whereas chapter 7 is more black and white (your assets are liquidated to pay creditors),
chapter 13 allows for the restructuring of debt and also provides a greater likelihood
of saving your home from foreclosure and your vehicle from repossession. The payments
plan that comes out of a chapter 13 bankruptcy will always be for a period of 3-5
years. A chapter 13 payment plan will never be more than 5 years in duration.

Another advantage of chapter 13 protection is that it will act like a debt consolidation
loan during the payment period. The debtor will make one monthly payment to the
bankruptcy trustee and the trustee will pay the appropriate amount to each creditor.
This makes the process easy to manage for the debtor.

Eligibility Requirements for Chapter 13 Bankruptcies

Any individual is eligible for chapter 13 protection as long as that persons unsecured
debts are less than $336,900 and secured debts are less than $1,010,650.00. Corporation
and partnerships are not eligible for chapter 13 protection. Aside from meeting
the debt amount requirements, a potential chapter 13 bankruptcy applicant must prove
that he or she has received credit counseling from an approved agency within the
last 180 days.

Let's take a look at some of the most common questions related to personal bankruptcy:

The most common question is -
how to file bankruptcy. While a debtor can file the paperwork and start proceedings
on their own it is not recommended. It is imperative that you seek the counsel of
an experienced bankruptcy to get you through the process.

Can bankruptcy stop foreclosure? Absolutely. The automatic stay provision of bankruptcy
protection will require your creditors (including your mortgage lender) to stop
all action against you for a period of time. However, the automatic stay is limited
in duration and your lender will proceed with action against you unless you reach
and agreement with them.

Can I file for bankruptcy for free? In most cases the answer is no. Each state has
mandatory fees associated with bankruptcy filings. In cases where the debtor can
clearly demonstrate an inability to pay, other provisions will be made. In addition
to the filing fees there are the significant fees that will need to be paid to your
attorney. While it is tempting to think that you should save the money and go without
an attorney, it is not a wise strategy. Using an attorney will typically get you
a better outcome and will pay for itself over the long term.

Finally, it is important to remember that deciding to file for bankruptcy protection
is a huge decision that will have a massive, negative impact on your credit for
years to come. While for many people it may be a great way to get a fresh start
- others may also find that an alternative product can give them the financial relief
they need. These days there are many
bankruptcy alternatives available such as debt settlement, credit counseling
and debt consolidation. Be sure to do your homework before making any decision.
For more information on products like debt settlement, credit counseling and debt
consolidation please visit our
debt relief section.